Will the $47B NXP Semiconductors NV (NASDAQ:NXPI) buyout hurt QUALCOMM, Inc. (NASDAQ:QCOM)’s future dividend payouts?
– Qualcomm has a healthy balance sheet that will allow it to sustain dividends comfortably for the next few years.
– The acquisition of NXP won’t change any of that.
– Qualcomm is merely going to use its idle cash lying in foreign countries to fund the buyout.
QUALCOMM, Inc. (NASDAQ:QCOM) has been a long-time favorite amongst dividend growth investors thanks to its steady stock appreciation and ever-increasing annual dividend payouts over the past decade. But after the chipmaker announced its acquisition of NXP Semiconductors NV (NASDAQ:NXPI) for $38 billion, it’s only natural to question whether its dividend payouts will be sustainable in the future or not. So let’s take a closer look at Qualcomm’s financial position to have a better understanding of it all.
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The Finances
Let’s start by looking at Qualcomm’s financial position. This is an important step in dividend sustainability analysis as it provides insights about whether the company would need to borrow funds to maintain its payout or not. Companies that are struggling in their operations and are highly leveraged are most likely to slash their dividends or raise debt to sustain their dividend payouts. (See also: Is Qualcomm Inc (QCOM) Stock A Better Bet Than Intel Corporation (INTC) Stock?)
Coming back to Qualcomm, its overall debt aggregates to about $11.7 billion (1). The debt figure might look lofty at first but it’s well under control as the chipmaker’s total stock holder’s equity stands at over $31.7 billion. This equates to a debt/equity ratio of a modest 37% only. This isn’t considered high by any means, suggesting that Qualcomm isn’t reeling under debt. Avid readers and Qualcomm investors might be knowing this fact, but we had to establish this baseline for readers who haven’t been closely following Qualcomm’s balance sheet over the recent past.
Moving forward, Qualcomm reported in its latest quarterly filing that it had $32.4 billion in cash and cash equivalents as on September 25, 2016. In comparison, its dividend payouts for the entire fiscal year aggregated to just $2.9 billion. So, in theory, Qualcomm has enough cash cushion to pay its dividends about 11 times. The chipmaker also generated $6.86 billion in free cash flow during FY16 which is enough to cover its annual dividend payout 2 times over. So, prior to factoring in the NXP buyout, we can see that Qualcomm can sustain its dividends very comfortably.
But we’re here to discuss Qualcomm’s dividends after factoring in the NXP buyout, so let’s get to that.
The NXP Semiconductors NV (NASDAQ:NXPI) Impact
So far we’ve discussed that Qualcomm had about $32.4 billion in cash and cash equivalents at the end of Q4 (September quarter) and that the NXP buyout would cost $47 billion. If you noticed, there is a shortfall of $5.6 billion. Therefore, in order to bridge this gap, Qualcomm will tap its future cash flows and raise about $13.6 billion in debt once the buyout gets regulatory approval. The chipmaker announced that it has already lined up creditors for the debt raise, so getting the funds shouldn’t be a problem. And since Qualcomm isn’t debt-ridden, this debt raise shouldn’t wreck its balance sheet.
“We secured $13.6 billion in committed financing in connection with signing the definitive agreement.” – FY16 Annual Report (2).
But this is only one-half of the story and discusses just the funding shortfall. Where will the major chunk of cash come from? Simple, Qualcomm would be tapping its foreign cash balance to fund the major part of this $47 billion acquisition. This is a very encouraging statement for dividend investors and I’ll tell you why. (See also: QUALCOMM, Inc.: Is QCOM Stock A Great Buy For 2017?)
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The thing is, most of Qualcomm’s cash and equivalents of $32.4 billion are lying idle in foreign countries. It has just $2.8 billion cash lying in the U.S while the remaining $29.6 billion is deposited in foreign countries. Now, Qualcomm can’t bring this foreign cash back in the U.S as it would attract something called double taxation. So $29.6 billion, or 91.3%, of Qualcomm’s entire cash balance can’t be used to pay dividends or fund stock buybacks which basically means that the bulk of its cash balance is lying idle in foreign countries, yielding a low interest income at best.
“Our cash, cash equivalents and marketable securities at September 25, 2016 consisted of $2.8 billion held by United States-based entities and $29.6 billion held by foreign entities. Most of our cash, cash equivalents and marketable securities held by foreign entities are indefinitely reinvested and would be subject to material tax effects if repatriated. However, we believe that our United States sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.” – FY16 Annual Report (2)
The NXP buyout takes care of this repatriation problem. Notice the words “cash held by foreign entities” in the following statement.
“We intend to fund the [NXP buyout] transaction with cash held by foreign entities, which will result in the use of a substantial portion of our cash, cash equivalents and marketable securities, and new debt.”— FY16 Annual Report (2)
QUALCOMM, Inc. (NASDAQ:QCOM) has explicitly stated that it would fund the NXP buyout using its cash lying in foreign countries. So the chipmaker is basically putting its idle cash to good use. Instead of earning low interest rates, or negative rates in some countries, the cash would now open up a new revenue stream for the chipmaker. So it’s a win-win for everyone.
The decision to tap foreign bank balance also means that Qualcomm won’t be touching its U.S-based cash and equivalents to fund the buyout (unless its financial position deteriorates drastically in the next few quarters) so the company’s dividend paying capability shouldn’t be affected. After all, it’s the domestic cash and free cash flows that are being used to fund dividends and stock buybacks at the end of the day.
Putting It All Together
QUALCOMM, Inc. (NASDAQ:QCOM) is only putting its idle cash to use which should boost its performance metrics such as ROCE, ROI, ROE and so on. Beyond that, there will be cost synergies, incremental revenues and slashing of overlapping jobs post NXP buyout, that would further strengthen Qualcomm’s financial position and dividend-paying capability. So if you were worried that the NXP buyout would strain Qualcomm’s dividends, then don’t be. Qualcomm’s dividends are sustainable and safe.
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The article Are Qualcomm Inc (QCOM) Dividends Safe Post The NXP Buyout? originally appeared on amigobulls.com. Watch our analysis video on QCOM
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